An overview

Published 1991 By Mascor Publishing Co. Copyright 1991 By Mascor Publishing Co. P.O. Box 8308 Silver Spring, MD 20907

All rights reserved


THe intent of this publication is to give the newcomer to the mail order field an overview of state sales and use tax laws as they affect a small mail order business. As of 1988, 45 states and the District of Columbia levy sales and use taxes. In researching this project, I was unable to find any publication that provided comprehensive information on sales and use taxes in all states. The information we present is based on limited research of laws in the State of Maryland, and several other northeastern states. Yet fundamental rules as pertaining to sales and use taxes appear to be fairly similar throughout the country. No information is this overview is to be construed as presentation of legal or tax advice or advice on any laws in any state or municipality in the U.S. Such advice and information should always be obtained from qualified attorneys. CPAs or the appropriate state or city sales tax office.

Without question, the two tasks that I dislike most are reading and writing about insurance or taxes. I had, therefore, put this project off for quite some time. What eventually prompted me to write it anyhow was I saw a definite need, often based on a lack of understanding about sales and use tax matters by newcomers to the mail order field. I promise you this will be as short and painless as the subject allows.


1. I List this fact first since it seems to represent the biggest misunderstanding: Sales tax is levied on intra-state sales only..

Sales taxes are no levied in interstate sales, except as shown below.. This simply means that the ABC Mail Order company located in Los Angeles, CA when selling an item to John Doe who lives in Denver, CO, does not charge him sales tax. The ABC Mail Order Co only needs to levy sales tax to a resident of the State of California. This rule is based on a Supreme Court decision of 1967 in which the Court decided that state sales cannot be levied on sales made to residents of another state. Congress did, however, amend this law earlier this year, and it now requires those mail order companies which have annual volumes in excess of $2.5 million dollars to collect sales tax on interstate sales. It is expected that the 2.5 million dollar figure will be lowered in the next several years, but it is unlikely that small or medium mail order companies will be required to charge sales tax on interstate sales in the foreseeable future.

2. State sales taxes are levied on retail sales only. It is the person who uses the product who must pay the taxes, not the various layers of companies which are between the manufacturer and the user.

3. You, the company, charge the tax and hold it in trust for your state until your next sales tax filing.

4. I am often asked:"since I am just starting out and just a small company can I just forget about charging the tax?" I definitely do not recommend such a course. If you do you are violating an important laws of your state and are subject to the consequences which can be severe. remember one of the most important premises of tax collection policy in this country is for the Federated State and local governments to require strict adherence. If they let one company, no matter how small, get away with non-compliance, the "Tax Collecting Structure" is adversely affected.

5. Along with the above question here is another equally popular one: "Since I am quite small, can I just pay it for my customer and not show it on the order form? The information I have been able to come up with is that all states feel very strongly about this point.. IT IS DEFINITELY, MOST EMPHATICALLY A NO-NO. I was told that any company who follows this practice is subject to (A)paying all taxes again though they may have been paid before, and(B) the company will be subject to all appropriate fines, interest penalties and punishment under the law. As the operator of a small mail order business, you sometimes are subject to using the promotional material that your suppliers provide you with; many of the circulars do not have sales tax information and you have a small problem. But it is very small because (A) It is easy enough to fix a circular; a little typewriter whitener, your local (or out-of-town) printer, typesetter, desktop publisher it is always a good practice to include your own order form which contains the sales tax information for your state. You will get more orders that way since some of your customers want to keep the promotional material you send them intact until they receive the goods. So an order form which costs less then 3 cents a piece is a good marketing tool and it will keep you out of trouble with your state authorities.

6. It is very easy to obtain the proper information and then to comply with it. I know when starting a business these small matters can often appear to be overwhelming, but almost always they just appear that way.. So, just take one step at a time. No matter where you live in this country, if your state has a sales tax, there will be an office nearby that will be glad to give you information. Just ask the telephone operator for the listing of the local state sales tax office. You will receive information in a few days. Generally there will be no fees to pay and forms are easy to fill out... In a few days or a couple of weeks, you will be issued a sales tax license. Your state does not care if you operate your business out of your home, garage, and office or warehouse location. All the state wants is to collect taxes.

7. Most, but not all states have quarterly filings. The sales tax office will set you up on a schedule. If you live in one of the less populous states and are just starting out, your quarterly amount due will be very small and could be as little as $1.. You still have to file and pay. If you operate in one of the large states such as California, New York, Texas, etc.. you may do quite a bit of business in your own state.

8. Certain products and most services are exempt from state sales taxes. Since different states have different rules, it is best to obtain the regulations for the state where your business is located.

9. Penalties for non-compliance with state sales tax laws vary, but in general are quite strict. It is best not to take chances and to strictly comply with the laws of your state.

10. Many cities throughout the country levy sales taxes. Such taxes are beyond the scope of this article. The principle and basic rules of city sales taxes, however, are similar to those of state sales taxes.

11. SALES TAX RESALE CERTIFICATES. Laws may vary by state but the principle is based on the premise that the sales tax is only paid by the consumer or "end-user." Yet your supplier is required by law to charge you the tax unless you can furnish him with a Sales Tax Resale Certificate. Example: You sell a series of reports both to customers inn your state and customers in other states, and you have them reproduced at a local quick print shop who charges you the appropriate sales tax.. Call your local sales tax office to obtain an application for a Tax Resale Certificate. As soon as you present it, your supplier can cease levying the tax on you. As previously stated, the reports you send to your out-of-state customer are not subject to state sales tax, but the reports you sell to your in-state customers are.

12. State use sales taxes are slightly more complicated to explain than sales taxes. A "use tax" generally applies under one or two circumstances : (A) You are buying certain quantities of supplies wholesale and are reselling most of the product. However, you are retaining part of the product for your own use or consumption. You must estimate that portion which you use, and pay the use tax on it.. (B) More commonly you are buying certain suppliers for your own use and not for resale from an out-of state supplier. You must pay the use tax on those items.. Some common examples are: Office supplies, printing supplies, office equipment, etc. Obtain specific information from your state. Use tax rates are assessed at the same percentage rate as sales tax rates. Items you buy out of state which you resell, such as books or other products, are not subject to the use tax.

I strongly recommend that you obtain specific information from your local sales tax office and then adhere to all laws and regulations of your state. The inconvenience of dealing with those rules will be minor compared to the possible serious consequences of non-compliance.

The last page of this article shows (1) The sales and use tax rates which were in effect on July 1, 1990, in those states and the District of Columbia which levy sales and use taxes. Changes may have occurred since that time.. (2) A sample ledger sheet which may be one way you could record your sales taxes. If you are audited, it is important that you be able to produce a workable system that indicates you record sales taxes as a routine procedure. (3) That portion of a sample order form which shows the sales tax information.. Please note that almost all states levy the sales tax on that amount which includes postage charges.

State General Sales and Use Taxes, 1990

State Percent rate State Percent rate Alabama 4 Missouri 4.225 Arizona 5 Nebraska 6 Kansas 4 Nevada 5.75-6 California 6-7 New Jersey 6 Colorado 3 New Mexico 4.75 Connecticut 8 New York 4.-8.25 D.C. 6 North Carolina 5 Florida 6 North Dakota 6.5-7.5 Georgia 4 Ohio 5 Hawaii 4 Oklahoma 4 Idaho 5 Pennsylvania 6 Illinois 6.25 Rhode Island 6 Indiana 5 South Carolina 5 Iowa 4 South Dakota 4 Kansas 6.25 Tennessee 5.5. Kentucky 5 Texas 6 Louisiana 4 Utah 6.25 Maine 5 Vermont 4 Maryland 5 Virginia 4 Massachusetts 5 Washington 6.5 Michigan 4 West Virginia 6 Minnesota 6 Wisconsin 5 Mississippi 6 Wyoming 3


ORDER # PRICE ___________________________________________________ ___________________________________________________ ___________________________________________________ Subtotal for items listed above _______________

Postage $2.00 minium...or 10% of order on orders over $20.00 _________________

Maryland residents: Add 5% of total (sales tax) _________________

Total amount enclosed _________________

Name _____________________________________________

Address __________________________________________

City ______________ State _____ Zip_______________

(________)Check (____________) Money Order


XYZ SALES CO. P.O. Box 1000 Baltimore, MD 20907

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